Tuesday, May 8, 2012

Making the Transformation to Monthly Recurring Revenue

I thought I would share an interesting topic held during one of our Virtual Peer Group sessions. We discussed the opportunities and challenges associated with making a transformation to a Monthly Recurring Revenue (MRR) business. There are significant business benefits associated with the MRR model including:

  • Higher total revenue and margin for the average customer engagement
  • Consistent revenue levels and a predictable long term revenue stream 
  • Higher valuation for your business during a future M&A event

The MRR model is also attractive to your customers and prospects as it removes the heavy up-front cost of IT deployment and replaces it with an affordable monthly operating expense that can be budgeted on a per employee basis. Market acceptance for the MRR pricing model has been well-established by the MSP community and is the perfect approach for CSPs as they introduce managed cloud services as an alternative to premise-based IT services.

We then compared the revenue value of a typical 25 employee deal and found that just during the first year of a managed services contract, a recurring revenue deal generated 2 to 4 times the revenue value when compared to a project based deal.

So having established the many benefits of recurring revenue, we turned our attention to some strategies for how to move from $50/user/year to $50/user/month. In general terms, the strategy is to wrap chargeable services around Google Apps, then add more cloud services using the same service wrap-around strategy, then layer premium offerings such as virtual CIO services on top of your service portfolio and finally, use these enhanced solutions, and a highly efficient sales process, to accelerate customer acquisition.

To go a bit deeper, we looked at some of the tools found in the Go-To-Market blueprint, including examples of chargeable one-time and recurring services. We also looked at a comprehensive 3-year revenue model that projects total accumulated revenue and margin against the cost of service delivery and cost of customer acquisition. We concluded the session with some ideas for how to survive the first year of the recurring revenue transformation where maintaining positive cash flow to fund the business during the early phase of the revenue ramp can be a challenge.

Here are some questions we considered as the group:

1. Are you considering making this transformation?
2. Have you already begun this transition?
3. What are your biggest concerns?
4. Where do you need the most help?
5. How can the VPG community or MSPexcellence provide assistance?

If you are not a VPG member and would like to get a sense for one of our VPG meetings, we have posted a recording of this session here.

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